Room For Hope? Fourth Largest Industry In France: It’s “Never Been This Catastrophic”

An awful turn of events in France, just when everyone was hailing signs of a recovery, of which evidence has been trickling in, albeit mixed at best. If you held your tongue just right, you could even see vague glimmers of hope.

New vehicle sales in July edged up for the first time since anyone could remember, by a minuscule 0.9% from the depressed levels a year ago. OK, there was an extra selling day, and sales per selling day actually dropped 3.5%, but hey, that’s still a lot better than the 9.7% plunge for the first seven months.

Consumer spending, after having dropped in the first quarter, was up 0.3% in the second quarter, despite the 0.8% dive in June. Maybe in July, frazzled consumers spent a little more as their confidence crept up from the abysmal record-breaking low levels in June.

In the same vein, the Purchasing Managers’ Index for services and manufacturing in July was still in contraction, but it was the least worst contraction in 17 months. Companies continued to shed jobs, but at the slowest rate in 15 months. That’s great. The economy was still falling, but more slowly – from already low levels to even lower levels. Time for hope.

But that hope hissed out of the hotel and restaurant sector. After a terrible summer of 2012, hotel traffic in July was even more terrible, dropping another 7% year over year. Along the coast, it was down “only” 10%; but in some regions in the Alps, it was down over 30%. The bad weather in the first half of July was blamed. But the weather was beautiful in the second half; that’s when the economic crisis was blamed. New this year: even destinations along the Mediterranean were “touched by the crisis.”

And now restaurants! Traffic plunged by a “historic” 13.2% in July. For the first seven months, traffic gave up 5%. Over the last two years, the sector lost 10% of its jobs.

“The situation has never been this catastrophic,” warned Michel Morin, president of the National Association of Theme and Commercial Restaurants (SNRTC). “Our enterprises are experiencing an unprecedented decrease in revenues, and the results of the past four weeks, lead us to fear the worst.”

Jean-Pierre Chedal, president of the restaurateurs in the National Association of Owners of Hotels, Restaurants, Cafés, and Caterers (Synhorcat), explained that there were differences by region and segment. “In Paris and Ile-de-France, the figures are not good, but not catastrophic. However, the rest of France and particularly the Atlantic Coast are more affected.” High-end restaurants were doing reasonably well, as were low-end fast-food joints. But restaurants in the middle were getting hammered, particularly chain restaurants. He ascribed these difficulties to “the problem of purchasing power, and gloom.”

The associations are screaming, not only because the industry is sinking deeper into a quagmire, but because the Value Added Tax for restaurants is going up again. In 2001, it was 19.6%, same as for most sectors. Then President Chirac, while running for reelection, promised to lower it. A promise that shattered on the floor of reality. He’d been blocked by the European Council’s fight against cross-border “tax dumping.” But President Sarkozy managed to arm-twist the Council into agreeing. And on July 1, 2009, the VAT was cut to 5.5%.

Enormous hoopla. It impacted the entire hospitality sector – hotels, restaurants, and cafés – the fourth largest sector in France with at the time 185,000 businesses. It was a grand bargain: restaurant owners committed to passing on the rate cut by lowering prices. That would stimulate consumption, which would create 20,000 jobs per year, for two years. Hallelujah.

Alas, since 2000, the sector had already been creating on average 15,000 jobs per year, with the exception of 2008-2009. So the ballyhooed 40,000 jobs over a two-year period would be a net gain of 10,000 jobs. The commitment to lower prices by 11.8% on average concerned only 12 products, such as coffee, bottled water, the daily special, etc., and each restaurant could lower prices on only seven of them. At best, it might have worked out to an overall cut in prices of 3% – not exactly a magnet to draw additional customers to the table.

But few restaurants lowered any prices. They swallowed with gusto the additional margin as profit. The hoped-for traffic didn’t materialize. Nor did the jobs. Wages didn’t go up either, as hoped. About a fifth of the employees in the sector were considered “working poor,” the highest of any sector. That failure of a tax cut to achieve anything at all turned into a toxic stew of mockery, scandal, and higher budget deficits.

As the Eurozone debt crisis spread its tentacles from the periphery to the core, and as France was sliding deeper into its budget quandary, raising the VAT in the restaurant sector suddenly became a solution. Hence, effective January 1, 2012, under a painfully grinning President Sarkozy who’d lose his job five months later, the VAT was jacked up from 5.5% to 7%. Since then, the tentacles have grabbed France, and its budget debacle has gotten worse. So President Hollande and his government found another solution: raise the restaurant VAT to 10%, effective January 1, 2014.

The associations of restaurant owners have stepped up their rebellion. They claim they’re worried about jobs, a hot-button subject in France, given its double-digit unemployment rate. But they’re really worried about profits: raising prices by the amount of the VAT increase will be very unpalatable for patrons. To keep traffic alive, restaurateurs might not raise prices, an ironic twist to their refusal to lower them in 2009. This time it would devour their margins, just when revenues are already in decline. And that may not even be the end of it. Jean-Pierre Chedal was “extremely cautious” about the next steps in the tax battle: he feared that the government might go beyond the 10% – a fear that doesn’t seem irrational.

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